Retrocession
Definition
Retrocession is reinsurance purchased by a reinsurer to protect its own book; the reinsurer is the retrocedent and the capital provider is the retrocessionaire. Retro can be proportional or excess of loss and is often written on an aggregate or industry-loss basis because the retrocessionaire is covering a diversified reinsurance portfolio rather than individual policies. ILS funds, sidecars and collateralized vehicles are major retro providers.
Why it matters
Investors in ILS funds can hold retro without seeing the word: an aggregate collateralized contract with a reinsurer, or a share of a vehicle that takes ceded business, is retro exposure. It pays well in quiet years and concentrates losses in the years that matter most for every other catastrophe holding. Knowing how much of a fund is retro, and on what trigger, is part of judging its worst case.
Common misconceptions
- •Retro is not just more of the same diversification. It concentrates market-wide events.
- •A reinsurer buying retro does not transfer its obligations to the original insurer.
- •Retro losses can take longer to settle because they depend on the reinsurer's own claims from many cedents.
- •The label is only a starting point. Investor outcomes usually depend on the governing documents, cash-flow priority, valuation policy, disclosure quality, and manager discretion surrounding the term, not just the shorthand definition used in marketing materials.
Technical details
Common retro forms
Aggregate excess of loss on a reinsurer's catastrophe portfolio.
Industry loss warranties bought by reinsurers.
Quota shares to sidecars or collateralized vehicles.
Cat bonds sponsored by reinsurers.
What to check as a retro capital provider
The reinsurer's portfolio by peril and region.
Trigger basis: indemnity, industry or aggregate.
Reporting lag and loss development terms.
Collateral release and dispute provisions.
How investors apply the term
Investors usually apply this term by tying the definition back to the controlling documents and then asking which cash flows, rights, restrictions, or valuation assumptions it changes. A useful review looks at the term alongside fees, leverage, liquidity, reporting frequency, and manager discretion rather than treating it as a standalone concept.
The practical diligence test is simple: identify who benefits if the assumption is wrong, who has control when conditions change, and what evidence the investor receives after closing. Terms that cannot be reconciled to documents, cash movements, and monitoring data should be treated as marketing shorthand until proven otherwise.
Frequently asked questions
- Why is retro considered higher risk?
- Because a reinsurer's portfolio already pools many insurers' catastrophe exposure, the losses that reach a retro layer tend to come from the largest events that hit the whole market. Retro positions are therefore highly correlated with each other and with other ILS.
- How do reinsurers use their own vehicles for retro?
- RenaissanceRe consolidates certain segregated accounts of Upsilon RFO 'and account[s] for the portion of its premium that we do not own as a ceded retrocession,' with Upsilon providing capacity to 'the worldwide aggregate and per-occurrence primary and retrocessional markets on a collateralized basis.'
- Does the original insurer see the retro?
- No. The insurer's contract is with its reinsurer; retrocession is a separate contract between the reinsurer and its providers. The insurer still relies on the reinsurer to pay.